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September 7, 2011

Delaying Retirement Age — Least Prejudicial Solution

by editor

Retiring later and continuing to make contributions over a longer period is the best way to juxtapose the pension welfare benefits of persons

The welfare of pensioners will be negatively affected as a result of the reforms that the Government of Spain have just implemented in order to balance their budget. However, the raising of retirement age is the least prejudicial measure. This is the view of Ms Patricia Peinado, who has analysed the effects that these changes will have on the retired population. She concluded that the worst scenario of these effects would be if the reforms were solely limited to extending the number of years computed to calculate their pensions. Delaying retirement age until later and increasing the number of years of contributions is the best combination for both financial and welfare balance, given the measures proposed. Her thesis, defended at the University of the Basque Country (UPV/EHU), is entitled Pension system's reform in Spain: a dynamic analysis of the effects on welfare.

Ms Peinado's work is based in three sub-studies. The first makes reference to the overall community of pensioners and, under the title, A dynamic analysis of the effects on pensioners' welfare of social security reforms, was published in the Journal of Pension Economics and Finance, the most important journal in matters of pensions. The second essay focused on gender differences and the third, on widowed pensioners.

Also future pensioners

The researcher considered the dynamism of the effects of the reforms. She thus analysed the trends in social welfare over time: she also studied the impact that delaying reforms could have on future generations of pensioners.

This line of research is reflected in the study on the overall numbers of retired persons (first study). In this Ms Peinado analysed what would happen if the implementation of these reforms were to be delayed to a point where there was not sufficient funding to pay all pensions. The researcher concluded that this decision would protect current pensioners, but involve greatest pension welfare losses for future generations of pensioners. Otherwise, this first essay is a prelude to more general conclusions: putting off retirement age is the best measure to confront the financial imbalance of the system while still guaranteeing welfare benefit, while a reform based solely on the increase in the number of years calculated to receive pensions would be the most prejudicial one.

Extending the period for calculating pension — prejudicial to everyone

These results are not very different from the second study, given over to the effects of the reforms on different sexes. For this study, two new dynamic indicators were defined, which enable quantifying both current and future differences. Ms Peinado concluded that, in order to face up to financial imbalance at the same time as reducing sex differences, of the measures proposed by the Government, the least prejudicial involves delaying the age for retirement and/or increasing the number of years of contributions. Once more, only increasing the number of years calculated to receive pensions by itself would incur the most prejudicial effects for welfare in terms of gender. The Government's proposal, nevertheless, is based on the three previously mentioned measures (delay retirement age, increase the number of years of contributions, increase the computation for eligibility). Even combining them, the effect on these differences would continue to be negative.

Finally, the third study, on the group of widowed pensioners, combines dynamic analysis with simulation techniques. These reconstructed the Ongoing Sampling of Working Lives (MCVL in its Spanish acronym and which is a set of individual but anonymous microdata), with the aim of calculating the trends in welfare. The lengthening of the number of years computed of a pension for an eligible person means a loss in pension benefit for their widow or widower also. Nevertheless, to palliate this loss, Ms Peinado mentioned the possibility of increasing the percentage of the pension of the deceased partner corresponding to the widowed pensioners' pension.

Unjust updating

Considering the results of the three studies, Ms Peinado thus concluded that, of the reforms proposed by the Government to maintain financial balance, delaying retirement age and increasing the number of years of contributions to obtain a pension is the combination that best guarantees the welfare of the retired population.

Finally, the researcher observed that the current model for updating pensions in Spain is prejudicial to those who receive them. This model obviates increases in productivity of the economy, which improves the welfare of the active population. As a consequence, the retired population has to survive with a purchasing power that grows less as the standard of living of society in general rises.